Clean energy market connectedness and investment strategies: New evidence from DCC-GARCH R2 decomposed connectedness measures

Teodoro Cocca, David Gabauer and Stefan Pomberger

Energy Economics, 2024, vol. 136, issue C

Abstract: In this study, we investigate the return propagation mechanism across four clean energy indices, namely, the NASDAQ OMX Green Economy Index, NASDAQ OMX Solar Energy Index, NASDAQ OMX Wind Energy Index, and NASDAQ OMX Geothermal Energy Index ranging from December 21st, 2010 until June 2nd, 2023 by using a novel DCC-GARCH-based R2 decomposed connectedness approach. This framework allows us to efficiently decompose dynamic conditional R2 goodness-of-fit measures into its decomposed components. Furthermore, we introduce the concept of minimum R2 decomposed connectedness portfolios and multivariate hedging portfolios. We find that the dynamic total connectedness is heterogeneous over time and economic-event dependent. In addition, the empirical results highlight that the NASDAQ OMX Green Economy Index is a net transmitter of shocks while all others are net receivers of shocks. Finally, we find that our proposed portfolio technique outperforms the NASDAQ OMX Green Economy Index as well as all alternative multivariate portfolio techniques regarding the hedging effectiveness score and the Sharpe ratio.

Keywords: DCC-GARCH; Dynamic connectedness; Contemporaneous connectedness; Dynamic conditional R2; R2 decomposition; Multivariate hedging portfolios; Multivariate minimum risk portfolios (search for similar items in EconPapers)
JEL-codes: C50 F30 G15 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:136:y:2024:i:c:s0140988324003888

DOI: 10.1016/j.eneco.2024.107680

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